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federal
R eserve Ba n k o f Dallas
DALLAS, TEXAS
7S222
Circular No. 83-106
September 7, 1983
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
REMOVAL OF INTEREST RATE CEILINGS ON TIME DEPOSITS
(Final Rule)
TO ALL MEMBER BANKS
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Depository Institutions Deregulation Committee (DIDC) has
issued a final rule, effective October 1, 1983, for the removal of interest rate
ceilings on time deposits. The DIDC has been authorized by the Depository
Institutions Deregulation and Monetary Control Act of 1980 to phase out interest
rate ceilings on deposit accounts. The proposal to accelerate the deregulation
of interest rate ceilings was outlined in Circular No. 83-5, dated January 17,
1983.
The new regulations apply only to accounts opened, renewed, or
extended on or after October 1, 1983. These regulations do not affect any
accounts that have not matured prior to that date.
Attached are copies of the DIDC's regulatory ruling and an appendix
for calculating certain early withdrawal penalties as submitted for publication in
the Federal Register. Questions regarding the m aterial contained in this circular
should be directed to the Legal Department, Extension 6171.
Additional copies of this circular will be furnished upon request to
the Public Affairs Department, Extension 6289.
Sincerely yours,
William H. Wallace
First Vice President
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B a n k s a n d o t h e r s ar e e n c o u r a g e d to u s e th e fo llo w in g in c o m in g W A T S n u m b e r s in c o n t a c t in g th is Bank:
1-800-442-7 140 ( in tr a s t a te ) a n d 1-800-527 -9 20 0 (in te r s ta te ). Fo r c a lls p l a c e d lo cally, p l e a s e u s e 651 plus th e
e x t e n s io n refe rred to above.
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
[12 C.F.R. PART 1204]
Docket No. 0031
Removal of Interest Rate Ceilings on Time Deposits
AGENCY:
Depository Institutions Deregulation Committee.
ACTION:
Final Rule.
SUMMARY:
Effective October 1, 1983, the Depository
Institutions Deregulation Committee ("Committee") has:
(1) eliminated all interest rate ceilings (a) on all
time deposits with original maturities or required notice
periods of more than 31 days, and (b) on time deposits of
$2,500 or more with original maturities or required notice
periods of seven to 31 days;
(2) eliminated other regulations on time deposits
except for : (a) the minimum early withdrawal penalties; (b)
a minimum denomination of $2,500 for ceiling-free time
deposits with original maturities or required notice periods
of seven to 31 days; (c) the current ceiling on time
deposits of less than $2,500 with original maturities or
required notice periods of seven to 31 days; and (d) the
rules of the agencies requiring a one percentage point
differential between a loan rate and the rate on a time
deposit securing a loan; and
(3) established the following new minimum early
withdrawal penalties:
(a) for time deposits with original
maturities or required notice periods of 32 days to one
year, loss of one month's simple interest; and (b) for time
deposits with original maturities or required notice periods
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of more than one year, loss of three months' simple
interest.
(The current penalty for the seven to 31 day
account set forth at 12 C.F.R. 1204.121 remains unchanged
and applies to all time deposits with original maturities or
required notice periods of seven to 31 days).
The new regulations apply only to accounts opened,
renewed or extended on or after October 1, 1983.
These
regulations do not affect any accounts that have not
matured prior to that date.
The Committee's actions were
taken to provide depository institutions with more
flexibility in managing their asset-liabil ity structures.
EFFECTIVE DATE:
October 1, 1983.
Certain conforming
amendments to the Committee's rules will be effective
November 1, 1983, and January 1, 1984.
FOR FURTHER INFORMATION CONTACT:
Paul S. Pilecki, Senior
Counsel, Board of Governors of the Federal Peserve System
(202/452-3281); Alan Priest, Attorney, Office of the
Comptroller of the Currency (202/447-1880); Jules Bernard,
Senior Attorney, F. Douglas Eirdzell, Counsel, Federal
Deposit Insurance Corporation (202/389-4171); Robert H.
Ledig, Attorney, Federal Home Loan Bank Board
(202/377-7057 ); or Betty A. Whelchel, Attorney-Adviscr,
Treasury Department (202/566-8737).
List of Subjects in 12 CFR Part 1204:
Banks, banking.
SUPPLEMENTARY INFORMATION;
The Depository Institutions
Deregulation Act of 1980 (Title II of P.L. No. 96-221,
12 U.S.C. 3501, et. seq.) ("DIDA") was enacted to provide
for the orderly phaseout, and the ultimate elimination of,
ceilings on the maximum rates of interest and dividends that
may be paid on deposit accounts.
Under the DIDA, the
Committee is authorized to phase out interest rate ceilings
by one or more of the methods specified in the Act,
including the complete elimination of ceilings applicable to
particular categories of accounts.
The Committee had adopted a deregulation schedule (12
C.F.R. 1204.119) that provides for the gradual removal of
interest rate ceilings beginning with longer term accounts.
Under this plan, there are no ceilings on time deposits with
original maturities of 2-1/2 years or more issued on or
after April 1, 1983.
Ceilings were scheduled to be removed
on accounts with maturities or required notice periods of
1-1/2 years or more on April 1, 1984; of 6 months or more on
April 1, 1985; and of 14 days or more on March 31, 1986.
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Subsequent events, however, have brought into question
the need to continue the deregulation process in accordance
with the Committee's deregulation schedule.
In the Garn-St
Germain Depository Institutions Act of 1982 (Pub. L. 97-320),
Congress provided for both (1) the elimination of the interest
rate differentials for all categories of insured accounts on
or before January 1, 1984, and (2) the establishment of the
ceiling-free money market deposit account ("MMDA") no later
than December 14, 1982.
Given these statutory mandates for
the accelerated elimination of the differential and the
establishment of the MMDA, the Committee began to question
whether ceilings on time deposits are still necessary.
Also,
the authorization of the MMDA, and later the ceiling-free NOW
account, created an anomalous situation where ceilings had
been eliminated on highly liquid short-term accounts and on
longer-term certificates of deposit, but not on the
intermediate accounts.
Depository institutions consequently
began to find it difficult to balance properly their
asset-liability structures.
The Committee, given the circumstances, decided at its
December 6, 1982 meeting to seek public comment on eliminating
the remaining ceilings and on several methods for accelerating
the deregulation of time deposits.
It received approximately
365 comments on those proposals.
Over half of the commenters
expressed the view that further deregulation should be
postponed because more time was needed for depository
institutions to absorb the changes that were taking place as a
result of the MMDA and the ceiling-free NOW account.
Many of
the respondents commented that the Committee should abide by
the schedule that was put in place in April 1982.
The most
typical response was that the Committee was issuing too many
new regulations too fast, and that it was hard for the
industry to keep up with all the DIDC changes, especially when
there was short lead time to prepare for the changes.
Commenters pointed out that it took time to teach employees
about the accounts so they could explain the new rules to the
customers, as well as make necessary data processing changes.
Over 40 percent of the commenters, however, indicated
support for some form of accelerated deregulation.
These
commenters pointed out that depositors did not have the
opportunity to invest in competitive, insured accounts with
maturities between six and 30 months.
In addition, these
commenters indicated that deregulation of all accounts would
allow depository institutions to price their deposits in a way
that would attract funds in the maturity categories that best
match the maturities of their loans and investments.
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At its March 1, 1983 meeting, the Committee voted to
table discussion of this issue and all the other agenda items
until the June meeting.
In part, that decision reflected the
fact that the then prevailing deregulation schedule called for
the minimum maturity of the long-term, ceiling-free account to
be reduced on April 1, 1983, from 3-1/2 years to 2-1/2 years
and the minimum maturity on the indexed small savers
certificate to be reduced from 30 months to 18 months.
Although institutions had known of these changes for over a
year and had time to plan for them, the changes were
significant and the Committee believed that institutions
should be given additional time to adjust to them before
further changes were made.
Moreover, depository institutions
were in the process of adjusting to the recently authorized
MMDA and the ceiling-free NOW account.
At its June 30, 1983 meeting, the Committee determined
that depository institutions had had sufficient time to adjust
to past changes in account structures and to prepare for the
complete elimination of all ceilings on accounts.
Therefore,
it decided, effective October 1, 1983, to eliminate virtually
all interest rate ceilings and other regulations governing
time deposits except for (1) required early withdrawal
penalties; (2) the $2,500 minimum denomination on the
ceiling-free, seven to 31- day account; and (3) the rules of
the agencies requiring a one percentage point differential
between a loan rate and the rate on a time deposit securing a
loan.
Thus, regulations such as those requiring that time
deposits of 1-1/2 years or more be made available in
denominations of $500 or more, or those restricting the
negotiability of the seven to 31 day account, have been
eliminated with respect to accounts established on or after
October 1, 1983.
The new interest rate ceiling structure will
be as follows:
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Interest Rate Ceiling Structure
Effective October 1, 1983
Interest Rate Ceiling
Account
Requ ired
Minimum Deposit
Commercial
Banks
Savings & Loan
Associations and
Savings Banks
NOW Accounts
0-$2,499
5-1/4%
5-1/4%
Ceil ing-f ree
NOW Accounts
$2,500
None
None
Passbook Savings
None
5-1/4%
5-1/2%
MMDA
$2,500
None
None
Time deposits of
7-31 days
$0-$2,499
5-1/4%
5-1/2%
Time deposits of
7-31 days
$2,500
None
None
All time deposits
of more than 31 days
None
None
None
The agencies advise that depository institutions may continue
to issue to governmental units time deposits of less than $2500
with maturities or required notice periods of seven to 31 days,
subject to the current ceiling of eight percent in effect for
such deposits.
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Since a minimum denomination of $2,500 will Etill be
required on ceiling-free, seven to 31-day accounts, all
regulations designed to uphold that requirement will remain in
effect with respect to seven to 31-day accounts.
Consequently,
the restrictions on loans, additional deposits, and automatic
transfers to other accounts set forth in Section 1204.121(b),
(d), and (e) will still apply to such accounts.
In addition,
since interest ceilings remain in effect for NOW accounts and
passbook accounts of less than $2,500, restrictions concerning
withdrawals from seven to 31-day time deposits in Section
1204.121(f) will remain in effect.
Similarly, since ceilings will remain in effect with respect
to time deposits of less than $2,500 with original maturities or
required notice periods of seven to 31 days, all regulations
designed to enforce ceilings shall remain in effect with respect
to such accounts.
Consequently, rules pertaining to premiums,
finders' fees, prepayment of interest, and payment of interest in
merchandise will still apply to those seven to 31-day accounts of
less than $2,500.
The Committee also established the following new minimum
early withdrawal penalties: (1) for accounts with original
maturities or required notice periods of 32 days to one year,
loss of one month's simple interest;
and (2) for accounts with
original maturities or required notice periods of more than one
year, loss of three months' simple interest.
It later clarified
its action with respect to the seven to 31-day account by a
notation vote, retaining the existing penalty and applying it to
all time deposits of seven to 31 days.
This penalty provides for
the forfeiture of the greater of (1) all interest earned on the
amount withdrawn from the most recent of the date of deposit,
date of maturity, or date on which notice was given, or (2) all
interest that could have been earned on the amount withdrawn
during a period equal to one-half the maturity period or the
required notice period.
Depository institutions are to invade the principal of the
account, if necessary, to impose the early withdrawal penalty.
To calculate the interest rate to be used in assessing the
penalty on floating rate or variable rate time deposits,
depository institutions should continue, after October 1, 1983,
to use the procedures already established for such calculations,
which are described in Appendix A.
The new minimum early withdrawal penalty will apply to all
time deposit contracts entered into, renewed, or extended on or
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after October 1, 1983.
Any time deposit issued before October 1,
1983, that is not renewed or extended on or after that date, will
be subject to the early withdrawal penalty in effect at the time
that the account was issued, renewed, or extended, whichever is
later.
Since early withdrawal penalties continue to apply to time
deposits, all regulations designed to enforce the penalties
remain in effect.
Consequently, any amendment of a time deposit
that results in a reduction in the maturity of a deposit will
continue to constitute the payment of a time deposit prior to
maturity, requiring the imposition of the early withdrawal
penalty.
Also, certain grace periods during which an
automatically renewed time deposit may be paid without the
imposition of the penalty still will be permitted.
Finally, all
disclosure and advertising rules concerning early withdrawal
penalties will remain in effect.
The new minimum early withdrawal penalty will be more severe
than existing penalties under limited circumstances.
For
example, the current minimum early withdrawal penalty for 91-day,
$2,500 time deposits is equal only to all interest earned on the
amount withdrawn.
The new minimum early withdrawal penalty on
those 91-day instruments that are renewed or extended on or after
October 1, 1983, will be more severe during the first 31 days of
the accounts, since the new minimum penalty on the 91-day
account is the loss of at least one month's simple interest.
All accounts that were issued with fixed maturities prior
to October 1, 1983, that are renewed or extended on or after that
date, will be subject to, and roust be modified to reflect, the
new early withdrawal penalties.
With regard, however, to
accounts that are subject only to required notice before
withdrawal and which, because of their notice feature, may not
actually be renewed or extended on or after October 1, 1983,
depository institutions may elect either (1) to continue to apply
the early withdrawal penalty established by the regulations
applicable to the account prior to October 1, 1983; or (2) to
modify the accounts to incorporate the new minimum early
withdrawal penalties.
Both the early withdrawal penalties for time deposits and
the $2,500 minimum denomination on the ceiling-free, seven to 31day account were retained to prevent an accelerated outflow from
passbook savings accounts.
In addition, the early withdrawal
penalty was believed to be desirable to protect depository
institutions that invest in long-term assets on the planning
presumption that the deposits will be maintained until maturity.
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The new regulations effectively will eliminate all
regulatory distinctions, other than the early withdrawal
penalties, among those accounts established or renewed on or
after October 1, 1983, that either (1) have original
maturities of more than 31 days, or (2) are of $2,500 or more
and have original maturities of 31 days or less.
Thus, the
Comir.i t tee's action simplifies the current account structure
and is intended to give depository institutions the flexi
bility to manage their liabilities in such a way as to attract
deposits in maturities that match their asset maturities.
In
this context, it should be noted that the regulations es
tablish the minimum early withdrawal penalties and require
ments applicable to accounts.
Depository
institutions may
establish stricter early withdrawal penalties, if they so
desire.
Similarly, depository institutions may limit the
interest they pay on both ceiling-free accounts and accounts
subject to ceilings, so long as the rate of interest paid in
the latter case is less than the rate established by
regulation.
The regulations governing time deposits issued
before October 1, 1983, passbook savings accounts, money
market deposit accounts, and NOW accounts are not affected by
the Committee's action.
The Committee, as is required by the Regulatory
Flexibility Act (5 U.S.C. 603, £t seq.), considered the
potential effect on small entities of removing interest rate
ceilings and regulations on time deposits with original
maturities or required notice periods of more than 31 days and
time deposits of $2,500 or more with original maturities or
required notice periods of 31 days or less.
The Committee's
action in this regard will not impose any new reporting or
record-keeping requirements.
Small entities which are
depositors should benefit generally from the Committee's
proposal, since they will have a wider selection of
instruments that will pay a market rate of return.
Small
entities which are depository institutions also should benefit
generally from the Committee's proposal, since they will be
better able to properly balance their asset-liability
structures.
If, however, low-yielding deposits shift into the
ceiling-free accounts as a result of the Committee's action,
small entities which are depository institutions may
experience increased costs.
The Etaff study, however,
concluded that any shift of low-yielding deposits into the
ceiling-free accounts due to the Committee's action is likely
to be minimal, most such transfers having taken place upon the
authorization of the money market deposit account and the
ceiling-free NOW account.
The Committee further imposed a
$2,500 minimum on ceiling-free accounts with original
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maturities or required notice periods of less than 31 days to
discourage sudden shifts from low-yielding short-term deposits
to ceiling-free accounts.
Pursuant to its authority under Title II of Public Law
96-221 (94 Stat. 142; 12 U.S.C. Sec. 3501, et seq.) to
prescribe rules governing the payment of interest and
dividends on deposits and accounts of federally insured
commercial banks, savings and loan associations, and savings
banks, the Committee amends Part 1204 — Interest on Deposits,
as follows:
1. Effective October 1, 1983, by adding a new section
1204.123 to read as follows:
SECTION 1204.123 - Payment of Interest on Time
Deposits Issued On or After October 1, 1983.
(a) Notwithstanding any other provision of Part
1204, a commercial bank, savings bank or savings and loan
association may pay interest at any rate agreed to by the
depositor on any time deposit issued, renewed, or extended on
or after October 1, 1983, that either (1) is in an amount of
$2,500 or more, or (2) has an original maturity or required
notice period prior to withdrawal of more than 31 days.
(b) An institution may permit additional deposits
to be made to any time deposit issued pursuant to this
section at any time prior to its maturity without extending
the maturity of all or a portion of the entire balance in
the account.
2. Effective October 1, 1983, by designating section
1204.103 as paragraph (a), by adding a new sentence at the
beginning thereof, and by adding new paragraphs (b), (c),
and (d) to read as follows:
SECTION 1204.103 —
Penalty for Early Withdrawals
(a)
The following minimum early withdrawal penalties apply
only to time deposit contracts entered into, renewed, or
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extended between June 2, 1980, and September 30, 1983,
and that have not been renewed or extended on or after
October 1, 1983.
*
*
*
*
(b) The following minimum early withdrawal penalties shall
apply to time deposit contracts entered into, renewed or
extended on or after October 1, 1983:
(1) Where a time deposit with an original maturity
or required notice period of seven to 31 days, or any
portion thereof, is paid before maturity, a depositor shall
forfeit an amount equal to the greater of (i) all interest
earned on the amount withdrawn from the most recent of the
date of deposit, date of maturity, or date on which notice
was given, or (ii) all interest that could have been earned
on the amount withdrawn during a period equal to one-half
the maturity period or the required notice period.
(2) Where a time deposit with an original maturity
or required notice period of 32 days to one year, or any
portion thereof, is paid before maturity, a depositor shall
forfeit an amount at least equal to one month's interest
earned, or that could have been earned, on the amount
withdrawn at the nominal (simple) interest rate being paid
on the deposit, regardless of the length of time the funds
withdrawn have remained on deposit.
(3) Where a time deposit with an original maturity
or required notice period of more than one year, or any
portion thereof, is paid before maturity, the depositor
shall forfeit an amount at least equal to three months'
interest earned, or that could have been earned, on the
amount withdrawn at the nominal (simple) interest rate being
paid on the deposit, regardless of the length of time the
funds withdrawn have remained on deposit.
(c) Notwithstanding paragraph (a), where a time deposit of
$2,500 to less than $100,000, with an original maturity of
91 days, that has been issued, renewed or extended before
October 1, 1983, but not renewed or extended on or after
that date, is paid before maturity, a depositor shall
forfeit an amount equal to at least all interest earned on
the amount withdrawn.
(d) Notwithstanding paragraph (a), where a nonnegotiable
time deposit of $2,500 or more, with an original maturity or
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required notice period of seven to 31 days, that has been
issued renewed or extended before October 1, 1983, but not
renewed or extended on or after that date, is paid before
maturity, the depositor shall forfeit an amount equal to at
least the greater of —
(i) all interest earned on the amount withdrawn
from themost recent of the date of deposit, date of
maturity, or date on which notice was given, or
(ii) all interest that could have been earned on
the amount withdrawn during a period equal to one-half the
maturity period or required notice period.
3. Effective October 1, 1983, Section 1204.121 is amended
as follows:
(a) by designating the name of the section
"sevento 31-day
time deposits"?
(b) by deleting
paragraph (a) thereof;
to be
the word "nonnegotiable" from
(c) by revising paragraph (c) to read as follows:
"(c) Section 102 of this part shall not apply to
time deposits issued under this section.
Where all or any
part of a time deposit issued under this section is
withdrawn within one business day after the maturity date of
the deposit or the date of expiration of notice of
withdrawal, no early withdrawal penalty is required to be
applied on the amount withdrawn."
4.
Effective October 1, 1983, the following sections of
Part 1204 are repealed:
1204.104, 1204.105, 1204.106,
1204.112, 1204.114, 1204.116, 1204.118, 1204.119, and
1204.120.
5. Effective January 1, 1984, paragraphs (c) and (d) of
section 1204.103 are repealed.
By Order of the Committee, August 18, 1983.
Executive Secretary
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APPENDIX A
Calculating the Early Withdrawal Penalty
for Floating Rate Time Deposits
If an interest rate on a time deposit is tied to an
index that is beyond the depository institution's control
(e . g .. Treasury security rate, commercial paper rate,
Federal funds rate, Federal Reserve discount rate) for the
entire term of the deposit, the institution may base the
simple interest rate, for purposes of calculating the
minimum early withdrawal penalty, on the rate in effect on
the date the account was opened, or on the date of
withdrawal, or on an average of the rates in effect during
the term of the deposit.
The institution must specify,
however, whether it will use the initial interest rate, the
rate on the date of withdrawal, or the average rate.
If the
interest rate on a time deposit is not tied to an index, but
instead varies in a precise way over the term of the
deposit, or the relationship of the rate changes in regard
to the index (e.q ♦, the commercial paper rate minus 50 basis
points for the first six months of the instrument and the
commercial paper rate minus 100 basis points thereafter),
then the depository institution must compute the minimum
early withdrawal penalty using the average of the simple
interest rates on the deposit during the time period that
the deposit was outstanding.
If the interest rate is established at regular
intervals and remains in effect for regular periods (e . g .,
the rate is established once a month and remains in effect
for one month), the depository institution must calculate
the average simple interest rate by taking the sum of the
rates established at each interval while the funds were on
deposit, divided by the number of periods the funds were on
deposit.
Each partial period will be considered a full
period for the purpose of this calculation.
If the length of the periods for which rates are
effective varies, the depository institution must calculate
the average simple interest rate by dividing the amount of
time a deposit was outstanding into equal periods and then
adding the rates that were in effect during those periods
and dividing by the number of periods.
The period used
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should be the shortest period for which a rate was in
effect.
For example, a time deposit might have the
following rates in effect for the following periods at the
time a depositor wished to withdraw the funds:
6 months (percent)
............................. ......... 15
1-1/2 years (percent)
1 year (percent)
.................................... 16
.......................................... 14
The total amount of time the deposit was outstanding was 3
years (6 months + 1-1/2 years + 1 year).
This 3-year period
would then be divided into 6 periods of 6 months each.
Then
the rates in effect for each period would be:
1st six mon th period
2nd six month period
3rd six month period
4 th six month period
5 th six month period
6 th six mon th period
To calculate the average simple interest rate, the rate in
effect during each period would be added together—
15 + 16 + 16 + 16 + 14 + 14 * 91
The resulting sum would then be divided by the number of
periods— 91 divided by 6—
to yield an average simple
interest rate of 15.17 percent.
Lump sum payments of cash that would be regarded as
interest (see 12 CFR 1204.109 and 12 CFR 1204.111), must be
taken into account in computing the penalty rate. Any
lump-sum payment must be prorated over the life of the
deposit.
The portion that is attributed to the time period
during which the deposit was outstanding must be regarded as
interest for purposes of computing the penalty rate.
The
portion attributable to the remaining life of the deposit is
regarded as unearned interest and must be deducted from the
principal amount of the deposit and returned to the
insti tu tion.
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